Listed property trusts go for gold

Falling debt costs and comparatively high property yields have enticed listed real estate trusts to re-enter the market in numbers not seen since the onset of the global financial crisis.

The
Commonwealth Property Office Fund
yesterday inked a deal worth $195 million for the striking skyscraper at 10 Eagle Street, Brisbane – dubbed the Gold Tower for its distinctive cladding – in its first acquisition in almost two years.

As foreshadowed in The Australian Financial Review earlier this month, the 1978 building was bought from Brookfield Asset Management at a yield of close to 7.4 per cent.

If the tower’s vacancy levels were reduced, the return could jump to as high as 8 per cent, Deutsche Bank analyst Jason Weate estimates.

When these figures are set against the 10-year bond rate of 5.7 per cent, it’s clear why A-REITs have regained their appetite for acquisitions.

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Commonwealth Property Office fund manager
Charles Moore
said there was a “yawning gap" between property yields in “prime office space in Brisbane and the cost of debt". He pointed out that the “10-year average spread to bond rates has been 183 basis points. That has ballooned to 440 points today so there is a 260-point spread to the historical ­average".

The positive yield gap is greatest on industrial property.

At a recent meeting hosted by the Property Council of Australia, Bank of America Merrill Lynch analyst Simon Garing argued the positive arbitrage is one of a number of factors that may transform the trusts from net sellers into net buyers.

Borrowing costs for well-capitalised vehicles had plummeted as demand for property debt soared, Mr Garing said, with Westfield’s five-year notes in the United States yielding just 2.9 per cent.

“It is not that difficult any more for the A-REITs to get debt," he said.

The CFS Retail Property Trust recently sold 15-year notes in the US at a yield of over 3 per cent and then repatriated the borrowing facility to Australia for under 6 per cent.

CLSA analyst John Kim said that the ability to tap the bond markets was a privilege reserved for the larger, financially muscular trusts.

The ongoing ructions in the euro zone meant debt markets were volatile, Mr Kim said, speculating that the weaker trusts may have to stay on the sidelines.
GPT Group
,
Dexus
and
Goodman Group
are among the major trusts that have switched to acquisition mode in a bid to exploit the positive yield gap.

Commonwealth Property is expected to follow its 10 Eagle Street acquisition with another purchase, given that its gearing remains comparatively low at 24 per cent.

The office landlord’s preferred gearing level is 30 per cent, giving it a war chest of up to $300 million to play with over the next few years.

Mr Moore indicated that the trust might not be doing any more fishing in Brisbane, however.

While he was “happy with the fund’s exposure" in the city, there was likely to be scope for more acquisitions in Sydney, Melbourne or Perth